Gold/Silver and Mining Stock Review

Gold and the mining stocks have taken a severe beating of late as supply-related pressures weigh heavily against the precious metals markets. In the weeks ahead gold and silver and mining stocks will have to work their way through the heavy overhead supply that has built up in recent weeks as too many "weak-handed" gold bulls have jumped into the market to allow for a sustainable upward trend. Once these weaker players have been sufficiently shaken out of the market, the market will be cleared for an upward trend resumption, probably not until later in the summer (around the time when the broad market will be falling under the weight of the crashing cycles). Investors must smell fear before they really commit to the gold and silver markets and there really isn't much fear out there yet. The fear, however, will come as the summer wears on.

In our May 24 issue of Bear Market Report we advised exiting the gold/gold stock market in advance of the correction. We wrote, "Those traders who haven't already done so should take profits (or partial profits in the case of long-pull traders) on all mining share profits as the odds favor an across-the-board pullback." The "pullback" turned out to be a bit steeper than we anticipated, nonetheless, it is very much in keeping with the natural forces of supply and demand which regulate the market and is a necessary "cleaning out" process before gold can resume its upward trend.

The story across the board in mining shares is the story of the Fibonacci 50% and 62% retracement levels. An astounding number of these stocks have either hit or are approaching 50-62% retracements of their 6-month upward trends this week. The XAU gold and silver mining index tested the 75-76 area referenced in Friday's newsletter, failing the test. If 75 does not hold on Tuesday, a drop down to 68-70 appears likely since this area represents the absolute low point of the 6-month upward trend from around 50 to this month's highs near 90. The 70 area also approximates to the 50% retracement level of the XAU's 6-month up-swing. Therefore, we must watch it closely.

August Gold futures are hovering near the $320 area and will almost certain test the 38% retracement area near $310-$312. This area also represents a chart support from a previous breakout and is intersected by a rising trend line off the March lows. Should $310 fail to hold, the next likely test would be at $310 in coming weeks and possibly even $305. The $305 level approximates to the 50% retracement level and also coincides with a rising trend channel bottom extending back into December 2001. At its absolute worst this gold market correction should not exceed $300, which represents the super floor of gold's 2002 bull market. It is an area where heavy insider buying took place and as such represents a powerful chart support should gold drop this low. When all technical factors are considered, gold has a good chance of staying above $310 and an excellent chance of being supported above $300-$305.

July Silver should hold above $4.80 in order to remain technically strong heading into the summer season. Should $4.80 fail a powerful chart support exists above $4.60. Interestingly, silver's predicted angle of ascent based on the December/January highs, shows a greater upside potential in percentage terms compared to gold later this summer when the cycles bottom and precious metals take off again.

Pan American Silver (PAAS) should decline no lower than $7 on a closing basis this week in order for its uptrend to remain intact. This level represents not only the 50% retracement area but also the extreme lower boundary of a 6-month rising trend channel.

Silver Standard Resources (SSRI) should ideally remain above $5 to remain on a solid foundation in coming months. The potentially bullish aspect of Silver Standard's chart is that the late January/early February highs in the daily bars project an extreme upside target of $11-$12 by the end of the year based on the technical discipline known as Predicted Trend Line Theory.

In typical Wall Street fashion, the financial press is doing its job of "warning" investors of coming danger by giving out the warning signal too late. First, the financial press advises investors to get long gold and gold stocks at an interim peak, then switches gears and tells them to avoid being long stocks when the broad market has already fallen significantly. A story appearing over the weekend on the Reuters news wire with the headline "Beware of Falling Stocks" cautioned investors that "widespread mistrust of corporate management, fears of more violence in the Middle East and sluggish corporate profit growth could conspire to drive stocks down in the week ahead." Notice how the press, including Reuters, were promoting stocks and leading the bullish camp's cheerleading squad all through the decline from the March highs near 10,700 down to the present lows near 9500. Only now after the market has fallen some 1,200 points do they tell people to "be careful." Undoubtedly, the press will be vocally bearish once the 40-week cycle bottoms and it's time to buy stocks again ahead of the summer rally.

The temerity (some would say criminality) of the Wall Street-controlled financial press has reached epidemic proportions. One recent banner advertisement on a prominent investment web site offers readers the chance to buy a book about "How America Made a Fortune and Lost its Shirt." For $21.95 you can discover how millions of gullible Americans were led to invest in the stock market during the boom years of the '90s, only to lose a fortune in the tech crash of 2000-2002. This "valuable" info comes to us, of course, well after the fact and is of no practical value at this point. The same people who told America to "buy, buy, buy" and who never told them when to sell (let alone sell short) now have the gall to sell them a book telling them exactly where they went wrong! As one of our colleagues recently said, the Wall Street press has turned into one giant "media bucket shop."

What this latest precious metals correction represents is the necessary "shaking out" of the newcomers, general public, and weak-handed traders by the insiders. The financial press and investment advisories were laying it on too heavy with the bullish talk on gold; consequently, the investing public loaded themselves up with gold and gold stocks too quickly and were not sufficiently strong to carry their holdings through a market downturn. This is all part of the sorting process of the market and it is very typical of the early stages of a long-term bull market. The insiders will be busy snapping up the supply dumped onto the market by the public in coming weeks, thus we can probably expect a trading range along the June lows into the August timeframe when the cycles are due to perk up again and gold/silver should see one a blast-off into the fall. We predict the next phase of the gold bull market later this summer will be the most dynamic one to date in terms of percentage gain and rate of ascent.

A colleague recently shared these thoughts with us, "It is so funny to talk to people about gold and gold miners. They don't have a clue and this latest TANK (vicious if not a trader) will keep them away for another 3 years. One of my clients called me and said "he couldn't take it". He dumped his gold mining stocks this A.M. [Tuesday] on the gap down. Have to remember, he was talking 'long term' and he bought last week!!! Try GIVING someone a one oz. Maple leaf or American Eagle. They won't take it. Now that is really funny. They'd have $300.00 in their hot littlehands and nooopppe, 'gold is useless!'" All too true, yet all too typical. And yet very much in keeping with the market forces which influence this behavior.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy. The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment. He is also the author of numerous books, including most recently “Kress Cycles.” For more information visit www.clifdroke.com